1H24 results are in line with our expectations

The company announced results for the first half of 2024: revenue of 41.04 billion yuan, up 2.68% year on year; net profit to mother of 2.55 billion yuan, down 9.31% year on year; after deducting non-net profit of 2.34 billion yuan, down 9.92% year on year. The results are in line with our expectations.

Development trends

Chinese medicine sector: The traditional Chinese medicine sector has maintained steady growth. According to the company's announcement, in the first half of 2024, Danan Pharmaceutical's revenue fell 2.0% year on year to 6.183 billion yuan. Among them, revenue from proprietary Chinese medicines increased by 8.18% year on year; revenue from chemical drugs decreased by 17.08% year on year. The gross margin of the Danan Pharmaceutical segment was 49.73%, down 1.37 percentage points from the previous year. In the first half of 2024, the Da Nan Medicine sector continued to expand the market and continue to promote “1+4" marketing integration. Among them, sales revenue of products such as Snake Gan Chuanbei Loquat Cream, Honey Chuan Bei Loquat Cream, Wind Oil, Xiaochaihu Granules, Kidney Nourishing Pills, Ammonia Yellow Min Capsules, Qingkailing Series, Yin and Lung Cleansing Tonic, etc., achieved the same rapid growth in sales revenue.

Health sector: Revenue declined slightly, and the company actively accelerated its international market layout. According to the company's announcement, in the first half of 2024, Big Health's revenue fell 7.2% year over year to RMB 6.538 billion. In the first half of 2024, the gross margin of the company's health sector was 42.98%, down 1.57 percentage points from the previous year.

In the first half of 2024, Wang Laoji Health launched new products such as rose flavor, freesia flavor, ear root flavor, and original herbal tea to further enrich the product matrix; the company carried out Wang Laoji's English logo launch campaign in an orderly manner to speed up the international market layout.

Large business sector: Revenue increased 6.12% year over year to 27.82 billion yuan. According to the company's announcement, in the first half of 2024, the gross margin of the company's large commercial sector was 6.39%, a year-on-year decrease of 0.49 percentage points. The company actively promotes the transformation of the commercial sector. By focusing on variety exploration, network expansion, terminal access, etc., the company continues to deepen the marketing system led by service and consolidating the main pharmaceutical wholesale business foundation. In addition, the company actively expands the equipment and import business.

Profit forecasting and valuation

Taking into account the slight decline in the company's gross margin, we lowered 2024 and 2025 net profit by 6.5% and 8.3% to 4.06 billion yuan and 4.26 billion yuan, respectively, up 0% and 5% year-on-year, respectively. The current A share price corresponds to the 2024/2025 price-earnings ratio of 10.7 times/10.2 times, and the H share price corresponds to the 2024/2025 price-earnings ratio of 6.6 times/6.1 times the price-earnings ratio. We keep A-shares outperforming the industry rating and target price of 36.1 yuan, corresponding to a price-earnings ratio of 14.5 times/13.8 times in 2024/2025, with 35.2% room for increase from the current stock price. We keep H shares outperforming the industry rating and target price of HK$26, corresponding to a price-earnings ratio of 9.4 times/8.7 times in 2024/2025, with room for 42.1% increase from the current stock price.

risks

The consumer market is fiercely competitive, and the price of Danan Pharmaceutical is under pressure.